How to Crash an Economy and Escape the Scene

By William D. Cohan -
Oct 21, 2012

Is it time to put the Great
Recession behind us?

Not in terms of the economy -- which remains bogged down
with high unemployment, low growth and other aftershocks -- but
rather when it comes to demanding a rigorous effort to hold Wall
Street bankers, traders and executives accountable for their
role in causing the financial crisis.

Should we just chalk it up to such simplified explanations
as “animal spirits ran amok” and “these things happen
occasionally”? Or should we continue to expend scarce political
and law-enforcement resources trying to get to the bottom of
what happened, and why, with a goal of holding the right people
legally and financially accountable?

It’s a conundrum, especially since many Americans have lost
enthusiasm for the fight. But the path we ultimately take will
reveal to us and the world much about who we are as a people and
what ethics, values and morality we stand for. It will also have
serious lasting implications if we hope to avoid a rerun of what
happened over the last five years.

At the moment, the message we are broadcasting far and wide
is: There will be no justice; there will be no accountability;
let’s return to the status quo as quickly as possible.

Moving On

There are, not surprisingly, powerful and articulate voices
in favor of moving on. In his book “Unintended Consequences,”
Edward Conard, a former Bain Capital partner of Mitt Romney (who
is willing to say the things Romney wouldn’t dare and has given
$1 million to a political action committee that supports the
Romney campaign), argues forcefully that occasional market
collapses such as 1929 and 2008 are a small price to pay for a
system of capital allocation that has produced vast sums of
wealth, extraordinary technical and financial innovation, and an
incentive system that rewards people handsomely for taking risks.

For better or for worse, Conard writes, this is the country
that produced Apple Inc. (AAPL), Google Inc. (GOOG) and Facebook Inc. (FB), among
the most admired corporations in the world. Conard believes the
sooner we get back to untethering Wall Street’s animal instincts
the better. That means modest regulation, at best, and an end to
any efforts at meting out justice for those personally
responsible for the financial crisis because, hey, stuff happens.

Likewise, in a recent speech at the Council on Foreign
Relations in Washington, Jamie Dimon, the chairman and chief
executive officer of JPMorgan Chase & Co. (JPM), returned to many of
his favorite themes. One was how little he cares for much of
what is in the Dodd-Frank law and the proposed Volcker Rule
which limits banks’ ability to trade for their own account. He
reiterated his belief that the right kind of financial
regulation is necessary, in the vein of laws preventing drunk
driving. But, like Conard, Dimon said the new regulatory
environment is holding back economic growth.

He said he had discussed the topic with business owners and
executives around the country: “They all say it’s terrible. So
it’s not just banks. We’ve done it to ourselves, folks. We’re
shooting ourselves in the foot and we’re doing it every day. Get
rid of that wet blanket and this thing will take off.”

Even Lloyd Blankfein, the chairman and chief executive
officer of Goldman Sachs Group Inc. (GS), has started to make noise
again after a few years of laying low. As part of what the press
has nicknamed his No Apologies Tour, which has taken Blankfein
to forums and media outlets across the country, he has also
called for jettisoning the wet blanket. “Getting rid of some
regulations and rules that are impairing people from investing
vast pools of liquidity that are on the sideline, that are not
owned by the government, that are theirs to invest but are just
sitting on the sideline” will help get the economy humming
again, he told CNBC.

Volcker Rule

The Wall Street Journal reported last week that while the
rest of us have moved on when it comes to the nitty-gritty
details of what, say, the Volcker Rule will end up looking like
when it is finally written, lawyers and lobbyists for Wall
Street firms are working the regulators over with renewed
intensity. JPMorgan Chase and Goldman Sachs have spent,
respectively, $12.7 million and $8.3 million since the passage
of the Dodd-Frank law in July 2010 on lobbying the regulators
who are still drafting the final regulations. Goldman asked last
week for an exemption for certain investments from a Volcker
rule proposal that would limit a bank’s total investment in
hedge and private-equity funds to 3 percent of Tier I capital.
Why? Goldman makes a boatload of money investing this way.

On the other side of the debate are people like Elizabeth Warren, the Democratic U.S. Senate candidate from Massachusetts,
who still believes that accountability for the bad behavior that
occurred years ago on Wall Street is essential. “People feel
like the system is rigged against them,” she said at the
Democratic National Convention in September. “And here’s the
painful part: they’re right. The system is rigged. Look around.
Oil companies guzzle down billions in subsidies. Billionaires
pay lower tax rates than their secretaries. Wall Street CEOs --
the same ones who wrecked our economy and destroyed millions of
jobs -- still strut around Congress, no shame, demanding favors,
and acting like we should thank them. Anyone here have a problem
with that? Well I do.”

I’m no fan of Elizabeth Warren -- I fear that her populism
and condescending tone will make her an ineffective Senator
(should she win) -- but I agree with her completely that we
cannot give up the fight to hold people responsible for what
happened on Wall Street in the years leading up to the financial
crisis.

Milking Banks

No one -- no one -- on Wall Street has paid a serious price.
The one criminal prosecution -- of the Bear Stearns hedge-fund
managers Ralph Cioffi and Matthew Tannin -- failed miserably.
Every bank has received its slap on the wrist, has had its
insurance carrier or its shareholders cough up a few hundred
million dollars -- the cost of doing business, don’t you know --
and moved on. And governments, most recently New York State,
have decided to milk the banks for badly needed cash rather than
charge the miscreants themselves.

Once upon a time, prosecutors were vigilant about
prosecuting bad financial behavior on Wall Street. According to
the Financial Times, during the savings-and-loan crisis of the
mid 1980s, some 3,500 bankers were jailed for their
transgressions. I still haven’t heard a good reason why the
number of successful prosecutions in the wake of our most recent
financial crisis remains at zero.